OK, that wasn’t there real name (it just sounded similar)-but it should be! We received an email today from a money manager headlined by their recent returns- plus 15% in 2009 and plus 34% in 2008! Wow, who wouldn’t want to use a company with the foresight and skill to come up with those returns over the past two years!!

Charlatan then proceeds to give you more info on their marvelous returns going back to 2004. When you come to the disclosures at the bottom (you know, the small print that nobody reads), things start to get a bit alarming. First is this potential problem- “ The performance data represents a combination of hypothetical and actual past performance.” Oh? This isn’t all their actual performance? That could be a problem.

“Returns are presented net of an assumed annualized investment management fee of 2.75%, deducted at a rate of 0.6875% quarterly.” Wow, they do have these terrific returns after fees, but that sure is a high fee for money management. We would say they are more than double what fees should be in order to be a fiduciary and put the client’s interests first. But still, they made you all that money in a horrible market after their fees!

Then much further down in the disclosure is the explanation of the combination of hypothetical and actual past performance. “All results prior to October 2009, rely on backtesting. Backtested performance is purely hypothetical and does not reflect actual trading in clients’ accounts. Results were achieved through retroactive application of a strategy that was designed with the benefit of hindsight. Accordingly, these results should not be viewed as indicative of the adviser’s skill.”

Oh my God! From 2004 to now, the actual data started in October of 2009. All the rest of that skilled approach we can pay an outrageous fee for- “purely hypothetical”. Any idiot can put together an investment program that is marvelous for any past period. Hindsight-always 20-20. How will it work in the future? Probably not too well, judging from our hypothetical projections!

Our question is-if the SEC is supposed to protect clients (and advisors who don’t read well or think clearly), why is any Registered Investment Advisor allowed to send out any data that isn’t their actual performance. Performance means, according to Merriam-Webster, something “accomplished”. Hypothetical performance seems like a contradiction in terms. Something accomplished, but in this case we are just pretending that we accomplished it. Come on, SEC. Let’s protect somebody!

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